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Tata Chemicals: Margins under pressure
Aug 6, 2013

Tata Chemicals has announced its June quarter results. The company has reported consolidated topline growth of 8% YoY while the bottomline has registered a decline of 30% YoY

Performance summary
  • Consolidated topline for the quarter grows 8% YoY, standalone topline grows 10% YoY
  • Operating margins on a consolidated basis shrink by 3.7%, leading to a 17% drop in operating profits
  • Bottomline suffers a 30% fall on the back of poor operating performance and lower other income
  • Net profits on a standalone basis grow 47% YoY on the back of lower interest and depreciation charges

  Consolidated Standalone
(Rs m) 1QFY13 1QFY14 Change 1QFY13 1QFY14 Change
Net sales 30,736 33,116 7.7% 15,454 16,925 9.5%
Expenditure 25,788 29,001 12.5% 13,218 14,795 11.9%
Operating profit (EBDITA) 4,948 4,115 -16.8% 2,236 2,130 -4.7%
EBDITA margin (%) 16.1% 12.4%   14.5% 12.6%  
Other income 383 201 -47.6% 409 462 12.8%
Interest (net) 1,244 1,130 -9.1% 569 442 -22.4%
Depreciation 1,368 1,145 -16.3% 566 410 -27.5%
Profit before tax 2,719 2,041 -24.9% 1,510 1,740 15.2%
Extraordinary items (616) (434)   (616) (434)  
Tax 450 363 -19.4% 212 301 41.7%
Profit after tax/(loss) 1,653 1,244 -24.7% 681 1,004 47.4%
Share of loss of associate 12 11 -2.6% - -  
Minority Interest 565 480 -15.0% -td> -/td>  
Net profit after minority interest 1,076 752 -30.1% 681 1,004 47.4%
Net profit margin (%) 3.5% 2.3%   4.4% 5.9%  
No. of shares (m) 254.8 254.8   254.8 254.8  
Diluted earnings per share (Rs)*   14.4        
Price to earnings ratio (x)*   17.7        
(*On a trailing 12-month basis)

What has driven performance in 1QFY14?
  • The 8% growth in consolidated topline was a combination of poor performance of the inorganic chemicals segment and good results posted by the fertilisers & the agri segment of the company. In other words, the good work done by fertilisers and agri inputs were nullified to a great extent by the inorganic chemicals segment of the company

  • Sales of soda ash, the company's main product and part of the inorganic chemicals segment, were affected on account of adverse conditions in overseas markets. The US market in particular was affected badly. Severe competition took toll on both prices as well as realizations

  • As far as other segments are concerned, fertilisers were able to grow 16% on standalone and 21% on consolidated basis on account of higher volumes. Although urea import prices were lower, the gains from lower realisations were cancelled on account of volatility in rupee.

  • Agri inputs segment put up a stellar show, growing by nearly 30% during the quarter on a standalone basis and 24% on consolidated basis.

    Segmental break up...
      Consolidated Standalone
    Segment 1QFY13 1QFY14 Change 1QFY13 1QFY14 Change
    Inorganic Chemicals
    Revenues 18,651 18,696 0.2% 6,868 7,026 2.3%
    PBIT 3,513 2,430 -30.8% 1,680 1,444 -14.0%
    PBIT margin 18.8% 13.0%   24.5% 20.6%  
    Fertilisers
    Revenues 6,978 8,447 21.1% 6,747 7,853 16.4%
    PBIT 280 438 56.6% 435 520 19.4%
    PBIT margin 4.0% 5.2%   6.5% 6.6%  
    Other agri inputs
    Revenues 4,470 5,522 23.5% 1,312 1,699 29.5%
    PBIT 412 541 31.5% 43 152 253.0%
    PBIT margin 9.2% 9.8%   3.3% 8.9%  
    Others
    Revenues 235 407 73.2% 231 401 73.7%
    PBIT (137) (90) -34.4% (83) (50) -40.0%
    PBIT margin -58.2% -22.0%   -35.8% -12.4%  
    *Excludes inter-segment and unallocated expenditure

  • Operating profits fell by 17% YoY during the quarter as purchases of stock in trade went up significantly as a percentage of sales. This increase seems to have come from the fertiliser side of the business.

  • PBT of the company came in lower by 25% YoY as besides lower operating profits, interest costs and lower other income also impacted profits negatively.

  • At the bottomline level, profitability fell further with net profits witnessing a 30% decline. Less than proportionate fall in minority interest contributed mainly to this decline.
What to expect?
At the current price of Rs 255, the stock trades at an EV/EBIT multiple of around 6.8 times its standalone FY15 expected EBIT. It should be noted that the soda ash business is cyclical in nature and since our valuations already take this factor into account, we do not fell the need to make any changes to our target price of the company. We thus maintain our BUY view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single mid cap stock comprises more than 3-4% of your portfolio.`

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